Tom Still: Investors from outside Wisconsin are finding worthwhile deals here | Economic news
For years, Wisconsin could be described as a “flyover state” when it comes to venture capital funds that have historically clustered on US shores. Why invest elsewhere if you could find all the talent and technology you needed in start-ups just a few blocks away?
It looks like some of these investors have Wisconsin on their flight plans…at least for a “flyover.”
Ninety different venture capital funds from outside of Wisconsin participated in 42 separate early-stage deals in Wisconsin in 2021, easily a record for this category of investor interest outside of Wisconsin’s borders. ‘State. The previous record, according to a Wisconsin Technology Council study, was 55 such investors in 31 deals in 2020.
Of the 90 investors who invested in Wisconsin companies in 2021, the breakdown showed 26 based in California – by the distant country’s top venture capital state – 12 in New York, 11 outside the United States, eight from Illinois and four from Massachusetts. Investors from 18 other states took part in one to three deals each.
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A natural question to ask: Why did so many non-Wisconsin investors show up in what was essentially a third of the state’s 119 total deals?
The short answer is co-investment, which means that many venture capital funds will invest with other venture capital funds if they find a worthy company and the size of the “increase” overall is too big for a single fund to afford or risk. This is happening within Wisconsin’s angel and venture capital community, and more frequently elsewhere in the country’s roughly 2,000 venture capital funds.
Co-investment deals do not take place, however, unless there are reasons for the deal to come to the attention of other investors. This is part of what is happening in Wisconsin.
- Some warm introductions are taking place, thanks to nationally renowned institutions investing in the venture capital asset class. The Wisconsin Alumni Research Foundation and the State of Wisconsin Investment Board are good examples. Both have been in venture capital deals for years, albeit under different terms. However, both organizations have extensive contacts in the venture capital world, particularly on the west and east coasts.
- Funding costs for start-ups in some places, such as California’s Silicon Valley, have increased for local and regional reasons, not to mention company valuations have become more frothy. A dollar invested in a start-up in Wisconsin, for example, can go further than a dollar invested in parts of California or the East Coast. This is partly because of the generally lower costs of doing business, but also because Wisconsin business valuations are often considered realistic by investors.
- There was a time when investors outside of Wisconsin might be confident in the technology solutions produced here, but less comfortable in the company’s potential leadership. Investors often want to invest in “the team,” that is, the business leaders who have successfully built, grown, and sold businesses in the past. As Wisconsin’s fledgling economy matured, more such managers emerged or were attracted to the state.
- There are more Wisconsin companies than ever that need to raise seven- or eight-figure investment funds. That often means looking outside of Wisconsin for the much larger rounds.
“Very often by the time a deal reaches the Series B round, there’s no one here big enough to touch it and certainly not fund it all,” said Dan Einhorn of Capital Midwest, a region-based fund. of Milwaukee.
Capital Midwest is one of Wisconsin’s largest and best-performing funds, so when he says there aren’t any Wisconsin funds big enough to get most companies through “Round B” ( defined most often as the third round of investment) which includes its own. Capital Midwest most often invests in companies in increments of around $500,000 to $2 million, he said. Once it gets much bigger, Capital Midwest is more likely to introduce the company to other funds than run the business.
Such IPOs are easier to do today, he said, because of “the better quality of deals (from Wisconsin) and better investors” who participated in the early rounds.
Wisconsin saw $852 million in 119 deals in 2021, which was a record $368 million from 2020 — which was also a record. This kind of progress, if it is to be repeated in an uncertain economy in 2022, must involve more connections and syndication with investors outside of Wisconsin.
Tom Still is the president of the Wisconsin Technology Council. Email: [email protected]